A rare chance for real tax reform

Two of the most powerful lawmakers in Washington just finished a nationwide tax-reform tour.

Senator Max Baucus (D-Montana) and Rep. Dave Camp (R-Michigan) chair the tax-writing committees of their respective branches of Congress and their roadshow was pitched as an opportunity to chat with regular Americans about tax policy.

Both Baucus and Camp insist that they’re interested in genuine dialogue, eager to listen to families, business owners, students, teachers, and countless other average Americans.

This openness is admirable. But it is important that the power duo establish at least a general framework of agreed-upon values before homing in on specific reforms. And one of the chief aims of the tax policy package resulting from this tour needs to be freeing up American businesses to thrive.

A modernized tax code would make American corporations significantly more competitive on the international stage. Right now, firms big and small are hamstrung by high rates and huge compliance costs.

Baucus and Camp need to be receptive to ideas that will free up producers to flourish and — equally importantly — attract new investment to American shores from foreign firms. Likewise, they must resist the temptation to hit politically popular targets with new taxes.

The last major overhaul of the American tax code was way back in 1986. The American economy has changed so much since then. The code is in desperate need of reform. Smart new policies aimed at boosting business would stimulate entrepreneurship and help established firms grow, further enlarging the economic pie for all Americans.

To start, the two lawmakers must recognize the importance of lowering the corporate tax rate. Both have already expressed support for such a move, though they don’t yet agree on a specific target rate.

At 39.1 percent, America’s corporate rate is the highest in the Western world. It’s a full 14 points above the average rate among Organisation for Economic Co-operation and Development countries.

Such a high rate does real harm to the U.S. economy. In 2013 alone, GDP may be more than 2.0 percentage points lower because of punishing corporate taxes. Over the long term, our elevated rate could cost the U.S. nearly $350 billion a year.

High federal taxes also threaten the incomes of retirees by depressing investment account growth. And they harm workers by suppressing wage growth and shrinking new employment opportunities. Over the long run, average American wages could be a full percentage point lower in real terms if the U.S. corporate rate remains this far out of step with the rest of the world.

Second, Baucus and Camp need to support tax simplification. The nation’s tax code clocks in at an astonishing 70,000 pages. In just the past decade, it’s been modified over 4,500 times. The code is massively complex and tremendously expensive to navigate.

Third, these two need to be wary of the misleading rhetoric that’s often bandied about, especially when it comes to unpopular industries like oil and gas. Despite the prevailing media narrative, oil and natural gas firms actually pay their fair share in taxes — and then some. The industry’s average tax rate is 41 percent, significantly higher than the overall economy’s average of 26.5 percent. Plus, as a recent Washington Post editorial explained, “no money from the U.S. Treasury goes to the oil industry.” The notion of subsidies for big oil is a myth.